Thematic investing can work, but it is a difficult path to tread. There are potential mistakes everywhere, and avoiding them isn’t always easy.
We see the same thing time and again.
People get excited about one sector because it’s being talked about a lot – AI would be a good example of that at the moment – and generally, when everyone is talking about something, it’s towards the relative peak of performance.
That means that it’s likely that you’ll have to withstand some dips in the future.
At Stockspot, our view is always that you don’t need thematic investments in your portfolio at all and that a core portfolio is really all that matters in the long run.
But we also appreciate that plenty of people like to have a crack and thematic investing can add something if an investor has a particular interest in a sector as long as they remain a small part of a wider, diversified portfolio.
That‘s why we offer Stockspot Themes, which allow customers with a balance of over $50,000 to pick either specific ETFs that they like or a bundle of thematic investments that suit their interests.
What are thematic investments?
Thematic investments are quite simple: they are a small, strategic addition to a core investment portfolio that allows investors to target specific market niches for potentially higher returns.
They’re also known as core/satellite investments, as the core of a diversified portfolio remains with satellite investments oriented towards whatever an investor thinks is likely to do well or towards an area in which they hold a specific interest.
The themes vary widely.
It might be commodities, like silver or lithium, which had a defensive asset to go with more traditional hedges like gold, which we include in every standard Stockspot portfolio.
It might be a specific sector of the market, such as tech or financial institutions, which an investor thinks is a solid bet on where they should put their cash.
It can also be a geographic area, such as Asia or the USA where an investor would like to have more exposure than might otherwise be available in a more traditional portfolio.
How do you pick core/satellite investments?
The first tip might be obvious, but it’s not to let the satellite overtake the core.
There’s a very good reason why a diversified portfolio based on exchange traded funds (ETFs) should form the bulk of your investments, so make sure that whatever thematic investments you choose, they always remain a very small part of your overall portfolio.
It’s been proven time and again that slow and steady wins the race as far as investing goes, so don’t rock that boat too much with side bets on specific themes.
At Stockspot, we only allow clients to put 20% of their overall portfolio into Themes, which means that 80% remains held in the standard, diversified portfolios. That’s always the most important part.
Secondly, it’s important not to double down. If you already have a lot of one type of investment in your portfolio, it doesn’t make much sense to keep pushing in that area.
Every Stockspot portfolio, for example, contains Australian shares – so having an extra thematic allocation there probably doesn’t add that much to what you already get.
Thematic investments are good for adding something that you don’t otherwise get that much of – Asian shares, for example, in this analogy – and increasing exposure as desired.
It’s worth digging deep into what constitutes the core portfolio before picking thematics.
When and how to start thematic investing
The same rules apply in thematic investing as in any type of investment as far as time horizons are concerned.
A common mistake is for people to pick a satellite investment that is hot now, but then want to switch in the future, which leads to constant chopping and changing.
Themes come in and out of favour as the media talks about different aspects of the market – remember, they always have to find something new to talk about! – but it rarely pays for an investor to switch on a whim.
Don’t expect quick results and, instead, back your themes over a long time period, like you would with a more diversified portfolio. As ever, set and forget is the best way forward.
Tied to this is dollar cost averaging.
We talk about this a lot, but it is particularly important in themes where there might be a sector that moves faster than a diversified portfolio, so buying in over a time period helps mitigate the risk of buying at market peak and having nowhere to go but down.
It pays to split over a few months or even longer to make sure that you’re getting in at a good average price.
View our portfolios past performance and find out how we can help you reach your long term goals.
Disclaimer: Investment in financial products involves risk. Past performance of financial products is no assurance of future performance.
This article contains general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this information, you should assess your own circumstances or seek advice from a financial adviser.
